Tuesday, January 06, 2009

Predictions for 2009

The year has only just begun, but I think we've seen enough hints of how the Obama administration will act to make some predictions for 2009. I'll check in again in 2010 to see how I did.

1. Deflation, and not inflation, will continue to be a problem in 2009

The Obama fiscal stimulus plan is, unfortunately, pathetic. I don't know what other word to use for a stimulus that only gives $500 to individuals. It will also be slow to roll out. The upshot is that we won't see anything announced until March, and things will continue to deteriorate into the summer. The usual suspects will be back at the trough by the end of the year. Net, in 2009, CPI will remain stagnant or continue to fall.

2. Unemployment will reach double digits in the US

See above.

3. Europe will do ever worse

I expect to see the euro continue to weaken against the US$. As poorly as fiscal policy is managed here, it is worse across the pond.

4. GM and Chrysler will get their second slug of the bailout under Obama

Their "restructuring plans" will be accepted as adequate, and they will get additional funding from the Government. I do not expect either company to materially change in 2009. They are zombies, but there is no one around to shoot them (twice) in the head.

5. Citibank will not go bankrupt

See above.

6. Oil will remain under $60 a barrel

Since global aggregate demand destruction will continue under weak American and European leadership, expect demand for commodities to remain weak. Cuts by Saudi may help a little, but oil will remain sedate.

7. There will be another sharp fall in equity markets

Equity markets will end the year another ~10% down. People will realize things are not getting better, which will trigger another round of selling.

8. Obama will raise taxes in mid 2009, to disastrous consequences

Just like FDR, Obama will start to worry about the deficit and move to raise taxes midyear. That, of course, will reduce aggregate demand further, and so make the economic situation worse

9. The Fed will maintain ZIRP through the year

Just like Japan, expect interest rates to remain on the floor

10. The Dubai real estate bubble will pop

A combination of falling equities and low oil prices will cause financier Abu Dhabi to reign in lending. That, combined with falling aggregate demand, will reverse momentum in Dubai real estate, and the bubble will pop there too.

Sadly, a grim 2009. I hope that I'm wrong in all of these predictions.